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7:53 AM, 28th December 2022, About A year ago 1
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Aside from tax, what are the pros and cons of holding UK rental properties in an LLP structure?
ANSWER >>> Holding UK rental properties in a limited liability partnership (LLP) structure can have both advantages and disadvantages. Some of the potential pros and cons of holding rental properties in an LLP structure are outlined below.
Pros:
Cons:
Do individual Members of an LLP remain affected by the Section 24 restrictions on finance cost relief?
ANSWER >>> Members of a UK limited liability partnership (LLP) may be affected by the Section 24 restrictions on finance cost relief if they are landlords who own rental properties through the LLP.
Section 24 of the Finance Tax Act 2015 introduced restrictions on the amount of finance cost relief that landlords can claim for the costs of borrowing money to finance their rental properties. Under the rules, landlords are generally only able to claim basic rate tax relief on their finance costs, rather than being able to offset these costs against their rental income.
The Section 24 restrictions apply to landlords who own rental properties as individuals, as well as to landlords who own rental properties through a company or other legal entity, including an LLP. If a member of an LLP is a landlord and owns rental properties through the LLP, they may be subject to the Section 24 restrictions on finance cost relief.
In an LLP what is the difference between a Members Capital Account and a Members Current Account?
ANSWER >>> In a UK limited liability partnership (LLP), a member’s capital account represents the member’s share of the capital of the LLP. This account is used to track the member’s contributions to the LLP, including any initial capital contributions made when the LLP was formed and any additional capital contributions made subsequently.
A member’s current account, on the other hand, represents the member’s share of the profits or losses of the LLP. This account is used to track the member’s share of the profits or losses of the LLP as they are earned or incurred.
The capital account and the current account are used to track the financial interests of the members in the LLP. The capital account represents the member’s ownership interest in the LLP, while the current account represents the member’s share of the profits or losses of the LLP. It is important for LLPs to maintain accurate records of these accounts to ensure that the financial interests of the members are properly reflected and to help manage the financial affairs of the LLP.
Can a Member of an LLP be allocated profits disproportionately to their share of capital for tax planning purposes?
ANSWER >>> Yes, it is possible for a member of a UK limited liability partnership (LLP) to be allocated profits disproportionately to their share of capital for tax planning purposes. In an LLP, the profits of the business are allocated to the members in accordance with the terms of the LLP agreement. This means that the members can agree to allocate profits in a way that is different from their capital contributions to the LLP.
For example, if two members of an LLP have equal capital contributions but one member has a higher tax rate than the other, they may choose to allocate a larger share of the profits to the member with the lower tax rate in order to minimize the overall tax liability of the LLP.
It is important to note that any allocation of profits must be consistent with the terms of the LLP agreement and must be based on a legitimate business purpose, for example, to recognise the work put into the business by an adult child who is ‘learning the business’ to continue the family legacy and business continuity generally.
Can an LLP take on a Member, such as an adult child, without that person contributing capital into the business?
ANSWER >>> Yes, it is possible for a UK limited liability partnership (LLP) to admit a new member who does not contribute capital to the business. In an LLP, the members contribute capital to the business in order to finance its operations and activities. However, it is not necessary for all members to contribute capital to the LLP.
The terms for admitting a new member to an LLP are typically set out in the LLP agreement, which is a legally binding document that outlines the rights and responsibilities of the members of the LLP. The LLP agreement may specify the conditions under which a new member may be admitted to the LLP, including whether or not the new member is required to contribute capital.
If the LLP agreement does not require a new member to contribute capital, the new member may still be admitted to the LLP and may participate in the profits and losses of the LLP based on their agreed-upon share. It is important for LLPs to carefully consider the terms of admission for new members and to ensure that the LLP agreement accurately reflects the terms agreed upon by the members.
Would this not fall foul of the transfer of income streams legislation in schedule 25 of the finance act 2009?
ANSWER >>> Schedule 25 of the Finance Act 2009 contains provisions related to the transfer of income streams, which are designed to prevent individuals from avoiding tax by transferring income-producing assets to a lower-taxed person. These provisions may be relevant in certain circumstances where an individual transfers an income stream to another person, such as a family member, in order to reduce their tax liability. However, it is important to note that the provisions of Schedule 25 apply to the transfer of income streams, rather than the admission of a new member to a limited liability partnership (LLP). In an LLP, the profits of the business are allocated to the members based on the terms of the LLP agreement and the member’s share of the profits is not considered an income stream for the purposes of Schedule 25.
How would this legislation affect transferring income streams to a corporate member of an LLP for tax planning purposes?
ANSWER >>> If an individual transfers an income stream to a corporate member of an LLP for tax planning purposes, the provisions of Schedule 25 may be relevant if the transfer is done solely for the purpose of reducing the tax liability of the individual or the corporate member. In such cases, the tax authorities may challenge the arrangement as an attempt to abuse the tax system.
It is important to note that the transfer of an income stream to a corporate member of an LLP may also be subject to other tax rules and regulations, such as the rules on the transfer of assets between companies.
Is it possible to transfer liabilities only to a corporate member of an LLP for tax purposes?
ANSWER >>> It is generally not possible to transfer liabilities only to a corporate member of a limited liability partnership (LLP) for tax purposes. In an LLP, the members are jointly and severally liable for the debts and obligations of the LLP. This means that each member is individually responsible for the debts and obligations of the LLP, regardless of their share of the profits or capital contributions.
However, it is possible for an LLP to admit a corporate member who has limited liability, meaning that the corporate member is not personally liable for the debts and obligations of the LLP. In this case, the corporate member would only be responsible for the debts and obligations of the LLP to the extent of its capital contributions or any other assets it has contributed to the LLP.
What are the tax implications of transferring assets or liabilities for people who are Members of the LLP to a corporate member of an LLP?
ANSWER >>> The tax implications of transferring assets or liabilities from individuals who are members of a limited liability partnership (LLP) to a corporate member of the LLP will depend on the specific circumstances of the case. In general, the transfer of assets or liabilities from individuals to a corporate entity may have tax implications, depending on the nature of the assets or liabilities being transferred and the tax treatment of the transactions.
If the assets being transferred are taxable assets, such as business assets or investments, the transfer may trigger tax consequences for the individuals and the corporate member, depending on the tax treatment of the assets and the terms of the transfer. Similarly, if the liabilities being transferred are taxable, such as debt obligations, the transfer may have tax implications for the individuals and the corporate member.
It is important to note that the transfer of assets or liabilities between individuals and a corporate entity may also be subject to other tax rules and regulations, such as the rules on the transfer of assets between companies.
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Simon Lever - Chartered Accountant helping clients get the best returns from their properties
13:12 PM, 28th December 2022, About A year ago
It is also possible, providing the partnership agreement allows, for a partner to transfer funds from their current account to their capital account.
The amount available to transfer could be the full amount of the profits, after a provision for tax. This would enable a partner with a small or zero capital account to increase their capital investment in the business which can help with long term IHT planning.